JPY/USD – Yen Loses Ground as Markets Eye Fed Announcement

USD/JPY is moving higher in Wednesday trading. The pair crossed above the 95 line in the Asian session, and has pushed up to mid-95 range in European trading. The dollar got some help from strong US housing data on Tuesday, as Building Permits, a key release, had its best showing since July 2008. The markets will be closely monitoring the Federal Reserve, which wraps up a two-day policy meeting on Wednesday and will issue a Monetary Policy Statement. There is a bank holiday in Japan on Wednesday, and Japanese Trade Balance will be released late on Wednesday (Thursday in Japan).

The epicenter of this week’s financial news is, of all places, Cyprus. One of the smallest members of the Eurozone, the island country is struggling, and thought it had concluded a bailout agreement (worth 10 billion euros) over the weekend with the EU and the IMF. However, a controversial provision in the agreement has enraged Cypriots and sent the currency markets spinning. Under the terms of the bailout package, deposit holders in Cypriot banks would be levied with a one-time tax, between 6.7% and 9.9%, depending on the size of the deposit. This tax is intended to raise 5.8 billion euros, which would be a condition to receiving the 10 billion euro bailout. There was a run on bank machines, as Cypriot banks were closed for a holiday. Taxing bank deposits is unusual, and there is a fear that other debt-ridden countries, such as Spain, could face bank runs as well. The drama continued on Tuesday, as the Cypriot parliament voted overwhelmingly against the bailout deal, despite the government’s pleas that rejecting the agreement could lead to a bank collapse. In an attempt to contain the fallout, Eurozone finance ministers are likely to meet today to discuss options following the vote in parliament.

In Japan, the powerful Bank of Japan has replaced governors, and the move is sure to have significant ramifications for the Japanese economy and currency. Haruhiko Kuroda, the incoming governor, is a strong proponent of monetary easing, and has been called a “dream choice” for Prime Minister Shinzo Abe, who wants to see further monetary easing in order to eliminate deflation and increase government spending. Abe has been a sharp critic of Shirakawa, the outgoing governor, who did not favor aggressive monetary easing. Kuroda has set a goal of 2% inflation within two years, and is expected to introduce additional easing, which will likely weaken the yen. The Japanese currency has already lost 20% against the US dollar, which has been a boon for Japanese exports. Although economic indicators continue to point to deflation in the economy, GDP was up slightly in Q4 of 2012, raising hopes that the government’s aggressive easing policy is starting to pay dividends.

Overshadowed by the crisis over the Cyprus bailout, the US Federal Reserve wraps up a policy meeting on Wednesday. The Fed is expected to maintain ultra-low interest rates, but the markets will be anxiously awaiting to see what the Fed decides regarding the current round of QE. With the US recovery looking stronger and unemployment dipping lower, there has been speculation that the Federal Reserve might wind down or modify its asset purchase program. However, Fed head Bernard Bernanke and other senior officials have said the current round of QE will continue until the US recovery deepens. If the Fed surprises the markets, we could see some volatility from USD/JPY.

USD/JPY for Wednesday, March 20, 2013

 USD/JPY 95.36 H: 95.45 L: 94.82

USD/JPY Techncial

The dollar has posted gains against the yen in Wednesday trading, and has moved above the 95 line. The pair is receiving weak support at 95.27, and this line could face further activity. There is stronger support at 94.59. On the upside, there is resistance at 96.02. This is followed by 97.24, which has not been tested since August 2009.

• Current range: 95.27 to 96.02

Further levels in both directions:

• Below: 95.27, 94.59, 93.14, 92.53 and 91.48
• Above: 96.02, 97.24, 98.45, 99.38 and 99.98

OANDA’s Open Position Ratios

USD/JPY ratio continues to shift positions this week, and has movement towards long positions. This activity is reflected in the current upward trend we are seeing, as the dollar has improved and crossed above the 95 line. The ratio has a majority of long positions, indicating a bias towards the dollar continuing to post gains against the yen.

The Japanese yen remains under pressure, as USD/JPY trades above the 95 line. With the BOJ expected to make introduce more easing, we can expect the yen to lose more ground. Traders should keep a close eye on today’s US Federal Reserve announcement, which is a potential market-mover and could affect the direction of USD/JPY.

USD/JPY Fundamentals

• 14:30 US Crude Oil Inventories. Estimate 1.8M
• 18:00 US FOMC Economic Projections
• 18:00 US FOMC Statement
• 18:00 US Federal Funds Rate. Estimate <0.25%
• 18:30 US FOMC Press Conference
• 23:50 Japanese Trade Balance. Estimate -1.01T 

*Key releases are highlighted in bold

*All release times are GMT

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.